The President's Medicare Budget: A First Step Toward Entitlement Reform

The President's Medicare Budget proposal should spark a major
debate on entitlement reform. Under the Bush proposal, growth in
Medicare spending would be marginally slowed, from an annual
projected growth rate of 7.2 percent to 5 percent. The Bush
proposal would save $178 billion over five years and $556 billion
over ten years. If enacted, its long-term impact would be a $10
trillion reduction in Medicare spending,[1] almost a third of the total
unfunded liability of the program. House and Senate leaders have
made it clear that they will ignore the President's Medicare
proposals,[2] but neither they nor taxpayers can avoid
the consequences of failure to address the rising costs of Medicare
and other unreformed entitlement programs: massive debt, crushing
taxation, and a lower standard of living for tomorrow's working
families.

Congress must start to consider long-term reform. The best
option is to transform Medicare from the defined benefits program
it is today into a defined contribution program for the next
generation of seniors. Such a program could incorporate the best
features of the Federal Employees Health Benefits Program (FEHBP),
thus maximizing patient choice and health plan competition while
providing predictable financing for taxpayers.

A Legal Requirement

This year's presidential budget submission acknowledges the need
for budgetary action on Medicare that is required by law. Under the
Medicare Modernization Act of 2003 (MMA), Congress established a
Medicare funding warning. In doing so, Congress also established a
procedure for presidential and congressional action, triggered by
the findings of the Medicare trustees for two consecutive years
that general revenue funding for Medicare exceeds 45 percent within
a seven-year period. In 2007, the Medicare Trustees made such a
finding.[3] The President, in accordance with the
"Medicare funding warning" provisions of the MMA, may submit a more
detailed legislative proposal by February 19, 2008.

An Incentive for Broader Reform

The President's budget proposal would put in place an automatic
0.4 percent reduction in Medicare payments to doctors, hospitals,
and other Medicare "providers" in any year in which the 45-percent
threshold for general revenues is exceeded. An additional 0.4
percent reduction would continue to apply as long as the dedicated
revenues for Medicare--the payroll taxes and premiums--cover 55
percent or less of the program's total costs.[4] The Administration
has made it clear that the provision is an incentive for Congress
to get serious on broader Medicare reform: "The provision is
intended to encourage Congress and the Administration to reach
agreement on reforms needed to slow the growth in program costs."[5]

Caution on "Provider" Payments

The President also proposes to adjust payment annually for
Medicare providers in such a way as to promote "best practices."
Medicare payment, in other words, would reflect "value-based
purchasing" to ensure efficient and high-quality delivery of care.
This approach is doubtless attractive to many in Congress,
precisely because the current Medicare payment system, which is a
system of administrative pricing, does not account either for value
or benefit to the patient in the delivery of care. It is a system
of price controls imposed on a nominally "fee for service" system
of reimbursement. Of course, the problem of value to the patient,
and regard for quality and benefit to the patient, could easily be
achieved through the introduction of market-based pricing into
Medicare program, a radical departure from current practice.
Markets reward the provision of quality and benefit very
efficiently.

Without further detail about "best practices," caution is, for
now, appropriate. The devil is in the details. Many prominent
health policy analysts favor a "pay for performance" system, a
recent fashion in health care policy, over the introduction of
free-market pricing into the program. But such a system would, in
effect, require the government to establish medical practice
guidelines for purposes of physician reimbursement. In the
enactment of the original Medicare law, Congress specifically drew
a bright line, though breached in practice, against federal
officials directing or guiding the practice of medicine in the
program. Naturally, many members of the medical profession are
properly concerned that such an arrangement would increase the
already heavy level of bureaucracy that governs Medicare physician
payment, as well as encourage gaming in the provision of medical
services at the expense of the sickest patients.[6] Budget proposals to
secure savings should not become a vehicle for policies that
entrench or increase the power of the existing Medicare
bureaucracy.

Income-Related Subsidies

Taxpayers subsidize roughly 90 percent of beneficiary costs. In
the MMA, Congress provided for differential premium payments for
wealthy seniors, requiring them to pay higher premiums for Part B
services, while also providing generous subsidies for low-income
seniors in the Medicare Part D drug program. In its budget
submission, the Bush Administration proposes to increase the
financial responsibility of wealthier seniors for the costs of
their care. High-income seniors would be expected to pay more than
low-income seniors, and the Administration would formalize this
distinction in other parts of the program. According to the
Administration, "This will be facilitated by a number of steps the
Administration has taken already that increase the transparency of
health care costs and quality, and support greater health care
value for Medicare beneficiaries."[7]

Conclusion

The President's Medicare budget proposals should start a major
national debate on Medicare, in particular, and the future of
entitlements in general. Given the enormity of the challenge, the
President has offered several major proposals that would
significantly reduce future Medicare spending and thus the massive
unfunded liability of the program. This, in turn, would lighten the
burden on current and future taxpayers.

The President has addressed the need to provide for long-term
sustainability of Medicare and has also suggested some desirable
policy changes that would improve the functioning of the program.
His proposal for linking the Medicare subsidy to beneficiaries'
income is a reasonable alternative to current law, as are his
proposals to make pricing and quality more transparent. It is not
necessary that Members of Congress agree in detail with the
President's specific proposals; but if not, it is necessary for
them to engage the entitlement issue and develop reasonable
alternatives of their own.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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